The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Financial Statements:
Federal Reserve Bank of Boston
As of and for the Years Ended
December 31, 2016 and 2015 and
Independent Auditors’ Report
Federal Reserve Bank of Boston
Contents
Page
Management’s Report on Internal Control over Financial Reporting
1
Independent Auditors’ Report
2-3
Abbreviations
4
Financial Statements:
Statements of Condition as of December 31, 2016 and December 31, 2015
5
Statements of Operations for the years ended December 31, 2016 and December 31, 2015
6
Statements of Changes in Capital for the years ended December 31, 2016 and December 31, 2015
7
Notes to Financial Statements
8-39
:
-
FEDERAL RESERVE
BANK oF BosroN"
- ATLANTIC AVENUI . BOSTON MA O221O
600
WWW. BOSTON FED.ORG
Management's Report on Internal Control Over Financial Reporting
March 8,2017
To the Board of Directors
The management of the Federal Reserve Bank of Boston (Bank) is responsible for the preparation and fair
presentation of the Statements of Condition as of December 31,2016 and 2015, and the Statements of Operations,
and Statements of Changes in Capital for the years then ended (the financial statements). The financial statements
have been prepared in conformity with the accounting principles, policies, and practices established by the Board of
Governors of the Federal Reserve System as set forth inthe Financial Accounting Manualfor Federal Reserve Banl<s
(FAM), and, as such, include some amounts that are based on management judgments and estimates. To our
knowledge, the financial statements are, in all material respects, fairly presented in conformity with the accounting
principles, policies and practices documented in the FAM and include all disclosures necessary for such fair
presentation.
The management of the Bank is responsible for establishing and maintaining effective internal control over financial
reporting as it relates to the financial statements. The Bank's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with the FAM. The Bank's internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the Bank's assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with FAM, and
that the Bank's receipts and expenditures are being made only in accordance with authorizations of its management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Bank's assets that could have a material effect on its financial statements.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of
human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial
statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The management of the Bank assessed its internal control over financial reporting based upon the criteria established
in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, we believe that the Bank maintained effective internal control over
financial reporting.
By
Eric S. Rosengren,
By
C. Montgomery,
0{L
Aparna Ramesh, Chief Financial Officer
Vice-President
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Independent Auditors’ Report
To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Boston:
We have audited the accompanying statements of condition of the Federal Reserve Bank of Boston (“FRB
Boston”) as of December 31, 2016 and 2015, and the related statements of operations and changes in capital
for the years then ended. We also have audited the FRB Boston’s internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The FRB Boston’s management is
responsible for these financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the FRB Boston’s internal control over financial reporting
based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States) and in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The FRB Boston’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with the accounting principles established by the Board of Governors of the Federal
Reserve System (the “Board”) as described in Note 3 of the financial statements and as set forth in the
Financial Accounting Manual for Federal Reserve Banks (“FAM”). The FRB Boston’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRB
Boston; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with the FAM, and that receipts and expenditures of the FRB Boston are
being made only in accordance with authorizations of management and directors of the FRB Boston; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the FRB Boston’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
As described in Note 3 to the financial statements, the FRB Boston has prepared these financial statements in
conformity with the accounting principles established by the Board, as set forth in the FAM, which is a basis of
accounting other than U.S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the FRB Boston as of December 31, 2016 and 2015, and the results of its operations for the years
then ended, on the basis of accounting described in Note 3. Also, in our opinion, the FRB Boston maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Boston, Massachusetts
March 8, 2017
Federal Reserve Bank of Boston
Abbreviations
ACH
ASC
ASU
BEP
Bureau
FAM
FASB
FAST Act
FOMC
FRBNY
GAAP
GSE
IMF
MAPD
MBS
OEB
SDR
SERP
SOMA
TBA
TDF
Automated clearinghouse
Accounting Standards Codification
Accounting Standards Update
Benefit Equalization Retirement Plan
Bureau of Consumer Financial Protection
Financial Accounting Manual for Federal Reserve Banks
Financial Accounting Standards Board
Fixing America’s Surface Transportation Act
Federal Open Market Committee
Federal Reserve Bank of New York
Accounting principles generally accepted in the United States of America
Government-sponsored enterprise
International Monetary Fund
Medicare Advantage and Prescription Drug
Mortgage-backed securities
Office of Employee Benefits of the Federal Reserve System
Special drawing rights
Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks
System Open Market Account
To be announced
Term Deposit Facility
4
Federal Reserve Bank of Boston
Statements of Condition
As of December 31, 2016 and December 31, 2015
(in millions)
ASSETS
Gold certificates
Special drawing rights certificates
Coin
System Open Market Account:
Treasury securities, net (of which $619 and $481 is lent as of December 31, 2016 and 2015,
respectively)
Government-sponsored enterprise debt securities, net (of which $1 and $4 is lent as of
December 31, 2016 and 2015, respectively)
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated investments, net
Central bank liquidity swaps
Accrued interest receivable
Bank premises and equipment, net
Other assets
Total assets
LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities
Deposits:
Depository institutions
Other deposits
Interest payable to depository institutions and others
Accrued benefit costs
Accrued remittances to the Treasury
Interdistrict settlement account
Other liabilities
Total liabilities
2016
$
Note 5
$
347
196
45
65,419
$
409
44,095
859
246
630
134
52
110,092
$
856
45,640
887
45
646
144
49
114,274
$
47,108
$
44,606
Notes 8 and 9
Capital paid-in
Surplus (including accumulated other comprehensive loss of $2 and accumulated other
comprehensive income of $6 at December 31, 2016 and 2015, respectively)
Total capital
Total liabilities and capital
355
196
47
63,069
Note 6
Note 5
2015
$
17,815
25
18,059
13
40,012
8
7
97
51
3,195
21
108,339
45,875
4
5
85
56
3,804
21
112,528
1,320
1,304
433
1,753
110,092
442
1,746
114,274
$
The accompanying notes are an integral part of these financial statements.
5
Federal Reserve Bank of Boston
Statements of Operations
For the years ended December 31, 2016 and December 31, 2015
(in millions)
INTEREST INCOME
System Open Market Account:
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated investments, net
Total interest income
INTEREST EXPENSE
System Open Market Account:
Securities sold under agreements to repurchase
Deposits:
Depository institutions and others
Total interest expense
Net interest income
NON-INTEREST INCOME
System Open Market Account:
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net
Foreign currency translation losses, net
Other
Compensation received for service costs provided
Reimbursable services to government agencies
Other
Total non-interest income
2016
Note 5
$
Note 5
Note 5
Change in prior service costs related to benefit plans
Change in actuarial (losses) gains related to benefit plans
Total other comprehensive (loss) income
Comprehensive income (loss)
1,582
24
1,149
2,755
$
Note 12
Note 3m
Note 9
Note 9
$
1,520
32
1,165
1
2,718
28
6
179
207
2,548
166
172
2,546
(3)
1
14
46
16
74
OPERATING EXPENSES
Salaries and benefits
Occupancy
Equipment
Other
Assessments:
Board of Governors operating expenses and currency costs
Bureau of Consumer Financial Protection
Total operating expenses
Net income before providing for remittances to the Treasury
Earnings remittances to the Treasury:
Interest on Federal Reserve notes
Required by the Federal Reserve Act
Total earnings remittances to the Treasury
Net income (loss) after providing for remittances to the Treasury
2015
1
(63)
15
47
16
16
176
32
12
31
170
31
13
32
63
26
340
61
22
329
2,282
2,233
2,253
2,253
29
1,989
1,021
3,010
(777)
(2)
(6)
(8)
21
$
1
1
(776)
The accompanying notes are an integral part of these financial statements.
6
Federal Reserve Bank of Boston
Statements of Changes in Capital
For the years ended December 31, 2016 and December 31, 2015
(in millions, except share data)
Balance at December 31, 2014
(25,910,272 shares)
Net change in capital stock issued (173,732
shares)
Comprehensive income:
Net loss
Other comprehensive income
Dividends on capital stock
Net change in capital
Balance at December 31, 2015
(26,084,004 shares)
Net change in capital stock issued (311,982
shares)
Comprehensive income:
Net income
Other comprehensive loss
Dividends on capital stock
Net change in capital
Balance at December 31, 2016
(26,395,986 shares)
Net income
retained
Capital paid-in
$
1,296
$
8
1,304
$
436
435
5
$
$
6
$
$
442
(777)
1
(78)
(846)
$
433
1,746
16
29
(8)
(30)
(9)
$
2,592
8
-
(8)
(8)
(2)
1,296
(777)
1
(78)
(854)
-
$
Total capital
-
1
1
29
(30)
(1)
$
Total surplus
-
-
16
1,320
$
(777)
(78)
(855)
16
$
1,291
-
8
$
Surplus
Accumulated
other
comprehensive
income (loss)
29
(8)
(30)
7
$
1,753
The accompanying notes are an integral part of these financial statements.
7
Federal Reserve Bank of Boston
Notes to Financial Statements
(1) STRUCTURE
The Federal Reserve Bank of Boston (Bank) is part of the Federal Reserve System (System) and is one of the 12
Federal Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal
Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the
federal government and possess a unique set of governmental, corporate, and central bank characteristics. The
Bank serves the First Federal Reserve District, which includes the states of Maine, Massachusetts, New
Hampshire, Rhode Island, Vermont, and a portion of the state of Connecticut.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of
directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve
Banks. Each board is composed of nine members serving three-year terms: three directors, including those
designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve
System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that
are members of the System include all nationally-chartered banks and any state-chartered banks that apply and are
approved for membership. Member banks are divided into three classes according to size. Member banks in each
class elect one director representing member banks and one director representing the public. In any election of
directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal
Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the
Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The
FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New
York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents.
(2) OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations. These functions include participating in
formulating and conducting monetary policy; participating in the payment system, including transfers of funds,
automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing
fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other
entities; serving as the federal government’s bank; providing short-term loans to depository institutions; providing
loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances;
serving consumers and communities by providing educational materials and information regarding financial
consumer protection rights and laws and information on community development programs and activities; and
supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of
foreign banking organizations, edge and agreement corporations, and certain financial market utilities that have
been designated as systemically important. Certain services are provided to foreign official and international
account holders, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations and
oversees these operations. The FOMC has selected the FRBNY to execute open market transactions for the
System Open Market Account (SOMA) as provided in its annual authorization. The FOMC authorizes and directs
the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury
securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed
securities (MBS); the purchase of these securities under agreements to resell; and the sale of these securities under
agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the
SOMA. The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are
held in the SOMA.
8
Federal Reserve Bank of Boston
Notes to Financial Statements
To be prepared to meet the needs specified by the FOMC to carry out the System’s central bank responsibilities,
the FOMC has authorized and directed the FRBNY to execute standalone spot and forward foreign exchange
transactions in the resultant foreign currencies, to hold balances in those currencies, and to invest such foreign
currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and agreements in the
SOMA. The FOMC has also authorized and directed the FRBNY to maintain reciprocal currency arrangements
with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion,
respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the
maximum amount of $5 billion.
Because of the global character of bank funding markets, the System has, at times, coordinated with other central
banks to provide liquidity. The FOMC authorized and directed the FRBNY to maintain standing U.S. dollar
liquidity swap arrangements and standing foreign currency liquidity swap arrangements with the Bank of Canada,
the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The FRBNY
holds amounts outstanding under these swap lines in the SOMA. These swap lines, which were originally
established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and will
remain in place until further notice.
The FOMC has authorized and directed the FRBNY to conduct small-value exercises periodically for the purpose
of testing operational readiness.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to
achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and
product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve
Banks. Various operational and management models are used and are supported by service agreements between
the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks
are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other
Reserve Banks. Major services provided by the Bank on behalf of the System for which the costs were not
reimbursed by the other Reserve Banks include Network Security Services, Financial Support Office, and
Centralized Accounting Technology Services. A portion of the Centralized Accounting Technology Services costs
related to services provided to the System in support of the electronic access channel is redistributed to the
Federal Reserve Bank of Chicago. The Bank’s reimbursement for these services was $2 million for each of the
years ended December 31, 2016 and 2015, and is included as a component of “Non-interest income: Other” in the
Statements of Operations.
(3) SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have
not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized
accounting principles and practices that it considers to be appropriate for the nature and function of a central bank.
These accounting principles and practices are documented in the Financial Accounting Manual for Federal
Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and
apply accounting policies and practices that are consistent with the FAM. The financial statements and associated
disclosures have been prepared in accordance with the FAM.
Due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given
the System’s unique responsibility to conduct monetary policy, the Board has adopted accounting principles and
practices in the FAM that differ from accounting principles generally accepted in the United States of America
(GAAP). The more significant differences are the presentation of all SOMA securities holdings at amortized cost,
adjusted for credit impairment, if any, the recording of all SOMA securities on a settlement-date basis, and the use
9
Federal Reserve Bank of Boston
Notes to Financial Statements
of straight-line amortization of premiums and discounts for Treasury securities, GSE debt securities, and foreign
currency denominated investments. Amortized cost, rather than the fair value presentation, more appropriately
reflects the financial position associated with the Bank’s securities holdings given the System’s unique
responsibility to conduct monetary policy. Although the application of fair value measurements to the securities
holdings may result in values substantially greater or less than their carrying values, these unrealized changes in
value have no direct effect on the quantity of reserves available to the banking system or on the ability of the
Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and
foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings
are sold before maturity. Decisions regarding securities and foreign currency transactions, including their
purchase and sale, are primarily motivated by monetary policy and financial stability objectives rather than profit.
Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are
incidental to open market operations and do not motivate decisions related to policy or open market activities.
Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP,
better reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost
bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for
amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method
required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and
cash position of the Bank are not a primary concern given the Reserve Bank’s unique powers and responsibilities
as a central bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the
Statements of Condition, Operations, and Changes in Capital, and the accompanying notes to the financial
statements. Other than those described above, the accounting policies described in FAM are generally consistent
with those in GAAP and the references to GAAP in the notes to the financial statements highlight those areas
where FAM is consistent with GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
The Statements of Operations have been renamed to better reflect the underlying nature of the activity reported
and, in the prior year, had been titled the Statements of Income and Comprehensive Income.
Significant accounts and accounting policies are explained below.
a. Consolidation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the
Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has
supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those
institutions’ compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the
financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System.
The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the DoddFrank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau
and determined that it should not be consolidated in the Bank’s financial statements.
b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization,
the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established
10
Federal Reserve Bank of Boston
Notes to Financial Statements
for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by
the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver
them to the Treasury. At such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate
accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per
fine troy ounce. Gold certificates are recorded by the Reserve Banks at original cost. The Board of Governors
allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank’s average
Federal Reserve notes outstanding during the preceding 12 months.
Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion
to each member’s quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary
reserves and may be transferred from one national monetary authority to another. Under the law providing for
U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the
Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are
credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are
increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the
purpose of financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR
certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks
based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year.
SDR certificates are recorded by the Reserve Banks at original cost.
c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin
held by the Bank. The Bank buys coin at face value from the U.S. Mint in order to fill depository institution
orders.
d. Loans
Loans to depository institutions are reported at their outstanding principal balances and interest income is
recognized on an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive
the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired
loans are evaluated to determine whether an allowance for loan loss is required. The Bank has developed
procedures for assessing the adequacy of any allowance for loan losses using all available information to identify
incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers,
and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values.
Generally, the Bank would discontinue recognizing interest income on impaired loans until the borrower’s
repayment performance demonstrates principal and interest would be received in accordance with the terms of the
loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first applied to
principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts
previously deemed uncollectible, if any, and then as interest income.
e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase,
and Securities Lending
The FRBNY may engage in purchases of securities under agreements to resell (repurchase agreements) with
primary dealers. Transactions under these repurchase agreements are typically settled through a tri-party
arrangement. In the United States, there are currently two commercial custodial banks that provide these services.
In a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement, pricing, and
pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and counterparty.
The collateral pledged must exceed the principal amount of the transaction by a margin determined by the
11
Federal Reserve Bank of Boston
Notes to Financial Statements
FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable
under repurchase agreements primarily includes Treasury securities (including Treasury Inflation-Protected
Securities, Separate Trading of Registered Interest and Principal of Securities Treasury securities, and Treasury
Floating Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and passthrough federal agency and GSE MBS. The repurchase agreements are accounted for as financing transactions
with the associated interest income recognized over the life of the transaction. These repurchase agreements are
reported at their contractual amounts as “System Open Market Account: Securities purchased under agreements to
resell” and the related accrued interest receivable is reported as a component of “System Open Market Account:
Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase agreements)
with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs,
and domestic money market funds. Transactions under these reverse repurchase agreements are designed to have
a margin of zero and are settled through a tri-party arrangement, similar to repurchase agreements. Reverse
repurchase agreements may also be executed with foreign official and international account holders as part of a
service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury
securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase
agreements are accounted for as financing transactions, and the associated interest expense is recognized over the
life of the transaction. These reverse repurchase agreements are reported at their contractual amounts as “System
Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable is
reported as a component of “System Open Market Account: Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight,
to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent
continues to be reported as “System Open Market Account: Treasury securities, net” and “System Open Market
Account: Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition.
Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the
securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for
borrowing securities, and these fees are reported as a component of “Non-interest income: System Open Market
Account: Other” in the Statements of Operations.
Activity related to repurchase agreements, reverse repurchase agreements, and securities lending is allocated to
each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement
account that occurs in the second quarter of each year.
f.
Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and
Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominated
Investments
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments
included in the SOMA is recorded when earned and includes amortization of premiums and discounts on the
straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and
includes amortization of premiums, accretion of discounts, and gains or losses associated with principal
paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the
term of the security to stated maturity, and the amortization of premiums and accretion of discounts are
accelerated when principal payments are received. Gains and losses resulting from sales of securities are
determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency
and GSE MBS are reported net of premiums and discounts in the Statements of Condition and interest income on
12
Federal Reserve Bank of Boston
Notes to Financial Statements
those securities is reported net of the amortization of premiums and accretion of discounts in the Statements of
Operations.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters
into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be
announced” (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or
purchase TBA MBS on a specified future date. During the years ended December 31, 2016 and 2015, the FRBNY
executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The
FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for
these transactions as purchases and sales, rather than as financing transactions, is appropriate because the
purchase or sale component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a
result, there is no transfer and return of securities. Net gains resulting from MBS transactions are reported as a
component of “Non-interest income: System Open Market Account: Federal agency and government-sponsored
enterprise mortgage-backed securities gains, net” in the Statements of Operations.
Foreign currency denominated investments, which can include foreign currency deposits, repurchase agreements,
and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to
report these assets in U.S. dollars. Any negative interest associated with these foreign currency denominated
investments is included as a component of “Interest income: System Open Market Account: Foreign currency
denominated investments, net” in the Statements of Operations. Foreign currency translation gains and losses that
result from the daily revaluation of foreign currency denominated investments are reported as “Non-interest
income: System Open Market Account: Foreign currency translation losses, net” in the Statements of Operations.
Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and
foreign government debt instruments and records the related securities on a settlement-date basis in accordance
with the FAM, the related outstanding commitments are not reflected in the Statements of Condition.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the
premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis
derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each
year. Activity related to foreign currency denominated investments, including the premiums, discounts, and
realized and unrealized gains and losses, is generally allocated in the first quarter of each year to each Reserve
Bank based on the ratio, updated in the first quarter of the year, of each Reserve Bank’s capital and surplus to the
Reserve Banks’ aggregate capital and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be
structured as either U.S. dollar or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is generally allocated in the first
quarter of each year to each Reserve Bank based on the ratio, updated in the first quarter of the year, of each
Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding
December 31.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified
amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market
exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second
transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign
13
Federal Reserve Bank of Boston
Notes to Financial Statements
currency on a specified future date at the same exchange rate as the initial transaction. The Bank’s allocated
portion of the foreign currency amounts that the FRBNY acquires are reported as “System Open Market Account:
Central bank liquidity swaps” in the Statements of Condition. Because the swap transaction will be unwound at
the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the
foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap
agreement. The Bank’s allocated portion of the amount of compensation received during the term of the swap
transaction is reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the
Statements of Operations.
Foreign currency liquidity swaps
Foreign currency liquidity swap transactions involve the transfer by the FRBNY, at the prevailing market
exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its
currency. The foreign currency amounts that the FRBNY receives are recorded as a liability.
h. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, which range from 3 to 50 years. Major alterations,
renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over
the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or
improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year
incurred. Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve
Banks.
Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the
application development stage to develop internal-use software are capitalized based on the cost of direct services
and materials associated with designing, coding, installing, and testing the software. Capitalized software costs
are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally
range from three to ten years. Maintenance costs and minor replacements related to software are charged to
operating expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired
and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets
or asset groups is not recoverable and significantly exceeds the assets’ fair value.
i. Interdistrict Settlement Account
Each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result from
transactions between the Reserve Banks and transactions that involve depository institution accounts held by
other Reserve Banks, such as Fedwire funds and securities transfers and check and ACH transactions. The
cumulative net amount due to or from the other Reserve Banks is reflected in the “Interdistrict settlement
account” in the Statements of Condition.
An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result
of the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount
equal to the average balance in the account during the previous twelve-month period ended March 31. An equal
and offsetting adjustment is made to each Bank’s allocated portion of SOMA assets and liabilities.
14
Federal Reserve Bank of Boston
Notes to Financial Statements
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued
to a specific Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as
collateral. The collateral value is equal to the book value of the collateral tendered with the exception of
securities, for which the collateral value is equal to the par value of the securities tendered. The par value of
reverse repurchase agreements is deducted from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately
collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for
outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain
assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve
Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes
become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are
obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve
notes outstanding, reduced by the Bank’s currency holdings of $5,499 million and $4,871 million at December
31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, all Federal Reserve notes outstanding, net, were fully collateralized. At
December 31, 2016, all gold certificates, all SDR certificates, and $1,447 billion of domestic securities held in the
SOMA were pledged as collateral. At December 31, 2016, no investments denominated in foreign currencies
were pledged as collateral.
k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository
institutions hold at the Bank. Required reserve balances are those that a depository institution must hold to satisfy
its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in
reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess
of their required reserve balances. The interest rates paid on required reserve balances and excess balances are
determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate.
Interest expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is
reported as a component of “Interest payable to depository institutions and others” in the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the
Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest
expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as
a component of “Interest payable to depository institutions and others” in the Statements of Condition. There were
no deposits held by the Bank under the TDF at December 31, 2016 and 2015.
Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held
at the FRBNY.
l. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an
amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par
15
Federal Reserve Bank of Boston
Notes to Financial Statements
value of $100, and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its
holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the
remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of
stock subscribed by it.
The Fixing America’s Surface Transportation Act (FAST Act), which was enacted on December 4, 2015,
amended section 7 of the Federal Reserve Act related to Reserve Bank surplus and the payment of dividends to
member banks. Until January 1, 2016, each Reserve Bank was required by law to pay each member bank an
annual dividend of 6 percent on the paid-in capital stock. Effective January 1, 2016, the FAST Act changed the
dividend rate for member banks with more than $10 billion of consolidated assets to the smaller of 6 percent or
the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment
of the dividend. The FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or
less of total consolidated assets. The dividend is paid semiannually and is cumulative.
m. Surplus
Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to maintain a surplus
equal to the amount of capital paid-in. On a daily basis, surplus was adjusted to equate the balance to capital paidin. Effective December 4, 2015, the FAST Act limits aggregate Reserve Bank surplus to $10 billion. Reserve
Bank surplus is allocated among the Reserve Banks based on the ratio of each Bank’s capital paid-in to total
Reserve Bank capital paid-in as of December 31 of each year. The amount reported as surplus by the Bank as of
December 31, 2016 and 2015 represents the Bank’s allocated portion of surplus.
Accumulated other comprehensive income (loss) is reported as a component of “Surplus” in the Statements of
Condition and the Statements of Changes in Capital. Additional information regarding the classifications of
accumulated other comprehensive income is provided in Notes 9 and 10.
n. Earnings Remittances to the Treasury
Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to transfer excess
earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment
of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Federal Reserve
Act, as amended by the FAST Act effective December 4, 2015, requires that any amounts of the surplus funds of
the Reserve Banks that exceed, or would exceed, the aggregate surplus limitation of $10 billion shall be
transferred to the Board of Governors for transfer to the Treasury. The Bank remits excess earnings to the
Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary
to maintain surplus at the Bank’s allocated portion of the $10 billion aggregate surplus limitation. Remittances to
the Treasury are made on a weekly basis. The amount of the remittances to the Treasury that were required under
the Board of Governor’s policy is reported as “Earnings remittances to the Treasury: Interest on Federal Reserve
notes” in the Statements of Operations. The amount of the remittances to the Treasury that are required by the
FAST Act is reported as “Earnings remittances to the Treasury: Required by the Federal Reserve Act” in the
Statements of Operations. The amount due to the Treasury is reported as “Accrued remittances to the Treasury” in
the Statements of Condition. See Note 12 for additional information on earnings remittances to the Treasury.
Under the previous Board of Governor’s policy, if earnings during the year were not sufficient to provide for the
costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury
were suspended, and under the FAST Act, if earnings during the year are not sufficient to provide for the costs of
operations, payment of dividends, and maintaining surplus at an amount equal to the Bank’s allocated portion of
the $10 billion aggregate surplus limitation, remittances to the Treasury are suspended. This decrease in earnings
remittances to the Treasury results in a deferred asset that represents the amount of net earnings a Reserve Bank
will need to realize before remittances to the Treasury resume.
16
Federal Reserve Bank of Boston
Notes to Financial Statements
o. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal
agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these
services. During the years ended December 31, 2016 and 2015, the Bank was reimbursed for all services provided
to the Treasury as its fiscal agent.
p. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta has overall responsibility for managing the Reserve Banks’ provision of
check and ACH services to depository institutions, the FRBNY has overall responsibility for managing the
Reserve Banks’ provision of Fedwire funds and securities services, and the Federal Reserve Bank of Chicago has
overall responsibility for managing the Reserve Banks’ provision of electronic access services to depository
institutions. The Reserve Bank that has overall responsibility for managing these services recognizes the related
total System revenue in its Statements of Operations. The Bank is compensated for costs incurred to provide these
services by the Reserve Banks responsible for managing these services and reports this compensation as “Noninterest income: Compensation received for service costs provided” in its Statements of Operations.
q. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau.
These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus
balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing,
and retiring Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising the
System’s net liability for Federal Reserve notes on December 31 of the prior year.
The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the
Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses
of the System as reported in the Board of Governor’s 2009 annual report, which totaled $4.98 billion. After 2013,
the amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of
total operating expenses of the System for the years ended December 31, 2016 and 2015 was 12.68 percent
($631.7 million) and 12.42 percent ($618.7 million), respectively. The Bank’s assessment for Bureau funding is
reported as “Assessments: Bureau of Consumer Financial Protection” in the Statements of Operations.
r. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s
real property taxes were $7 million for each of the years ended December 31, 2016 and 2015, and are reported as
a component of “Operating expenses: Occupancy” in the Statements of Operations.
s. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of
business activities in a particular location, the relocation of business activities from one location to another, or a
fundamental reorganization that affects the nature of operations. Restructuring charges may include costs
associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in
the period in which the Bank commits to a formalized restructuring plan or executes the specific actions
contemplated in the plan and all criteria for financial statement recognition have been met.
In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the
U.S. Treasury at the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Kansas City, the FRBNY,
and the Federal Reserve Bank of St. Louis. The consolidation is expected to be completed in future years.
17
Federal Reserve Bank of Boston
Notes to Financial Statements
Note 11 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities
associated with employee separations and contract terminations. Costs and liabilities associated with enhanced
pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the
books of the FRBNY.
The Bank had no significant restructuring activities in 2016 and 2015.
t. Accounting Policy Change and Recently Issued Accounting Standards
The Board of Governors approved, effective January 2017, accounting for Treasury securities, GSE debt
securities, and foreign government debt instruments held in the SOMA using the effective interest method.
Previously, the cost bases of these securities were adjusted for amortization of premiums or accretion of discounts
on a straight-line basis. This change will be applied prospectively. This update is not expected to have a material
effect on the Bank’s financial statements for the year ended December 31, 2017.
Other than the significant differences described in Note 3, the accounting policies described in FAM are generally
consistent with those in GAAP. The following items represent recent GAAP accounting standards and describes
how FAM was or will be revised to be consistent with these standards.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to create common
revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is
applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This
update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive
in return for the transfer of goods or services to customers. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the
required effective date of this accounting by one year. In March 2016, the FASB issued ASU 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net), which provided clarity regarding what constitutes the transfer of a good or service. In April
2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing. This update provides further criteria to help identify whether goods or
services within a contract are separately identifiable and, consequently, should be deemed distinct revenue
streams. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients, which provides guidance on assessing collectability,
noncash consideration, and how contract modifications and completed contracts should be treated during the
transition to new accounting guidance. This revenue recognition accounting guidance is effective for the Bank for
the year ending December 31, 2019, although the Bank may elect to adopt the guidance earlier. The Bank is
continuing to evaluate the effect of this new guidance on the Bank’s financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software
(Subtopic 350-40). The amendments in this update provide guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a software
license, then the customer should account for the software license element of the arrangement consistent with the
acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the
customer should account for the arrangement as a service contract. Consequently, all software licenses within the
scope of subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. This update is
effective prospectively for the Bank for the year ended December 31, 2016, and did not have a material effect on
the Bank’s financial statements.
18
Federal Reserve Bank of Boston
Notes to Financial Statements
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in this update
eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for
financial instruments measured at amortized cost on the balance sheet. This update is effective for the Bank for
the year ending December 31, 2019. The Bank is continuing to evaluate the effect of this new guidance on the
Bank’s financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess
how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets
and lease liabilities on the balance sheet. The update is effective for the Bank for the year ended December 31,
2020, although earlier adoption is permitted. The Bank is continuing to evaluate the effect of this new guidance
on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This update revises the methodology for assessing
expected credit losses and requires consideration of reasonable and supportable information to inform credit loss
estimates. The update is effective for the Bank for the year ending December 31, 2021, although earlier adoption
is permitted. The Bank is continuing to evaluate the effect of this new guidance on its financial statements.
(4) LOANS
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers (depository institutions that
maintain reservable transaction accounts or nonpersonal time deposits and have established discount window
borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest
rate established at least every 14 days by the Bank’s board of directors, subject to review and determination by the
Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight,
whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk.
Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities;
GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations;
asset-backed securities; corporate bonds; commercial paper; and bank-issued assets, such as certificates of
deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the
Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to
ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer
qualifies for these programs, the Bank will generally request full repayment of the outstanding loan or, for
primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily
against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding
loans are required to provide additional collateral or to make partial or full repayment.
The Bank had no loans outstanding as of December 31, 2016 and 2015.
At December 31, 2016 and 2015, the Bank did not have any loans that were impaired, restructured, past due, or on
non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years
ended December 31, 2016 and 2015. Interest income attributable to loans to depository institutions was
immaterial during the years ended December 31, 2016 and 2015.
19
Federal Reserve Bank of Boston
Notes to Financial Statements
(5) SYSTEM OPEN MARKET ACCOUNT
a. Domestic Securities Holdings
The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting
securities in the SOMA.
Pursuant to FOMC directives, the FRBNY has continued to reinvest principal payments from its holdings of GSE
debt securities and federal agency and GSE MBS in federal agency and GSE MBS and to roll over maturing
Treasury securities at auction. During the years ended December 31, 2016 and 2015, the FRBNY continued the
reinvestments and rollovers.
The Bank’s allocated share of activity related to domestic open market operations was 2.457 percent and 2.535
percent at December 31, 2016 and 2015, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net,
excluding accrued interest, held in the SOMA at December 31, 2016 and 2015 was as follows (in millions):
2016
Treasury securities
Notes
Bonds
Total Treasury securities
Unamortized
premiums
Par
$
$
40,242
20,277
60,519
GSE debt securities
$
Federal agency and GSE MBS
$
Treasury securities
Notes
Bonds
Total Treasury securities
$
$
$
363
2,548
2,911
397
$
12
$
42,778
$
1,327
$
$
$
41,440
20,959
62,399
GSE debt securities
$
Federal agency and GSE MBS
$
$
2015
Unamortized
premiums
Par
$
Unaccreted
discounts
$
$
531
2,890
3,421
835
$
21
$
44,297
$
1,362
$
$
Total amortized
cost
(138)
(223)
(361)
(10)
Unaccreted
discounts
$
$
40,467
22,602
63,069
$
409
$
44,095
Total amortized
cost
(164)
(237)
(401)
(19)
$
$
41,807
23,612
65,419
$
856
$
45,640
There were no material transactions related to repurchase agreements during the years ended December 31, 2016
and 2015.
During the years ended December 31, 2015 and 2016, the FRBNY entered into reverse repurchase agreements as
part of its monetary policy activities. From September 23, 2013 through December 16, 2015, these operations
were for the purpose of further assessing the appropriate structure of such operations in supporting the
implementation of monetary policy during normalization. Since then these operations have been undertaken as
necessary to maintain the federal funds rate in a target range. In addition, reverse repurchase agreements are
entered into as part of a service offering to foreign official and international account holders. Financial
20
Federal Reserve Bank of Boston
Notes to Financial Statements
information related to reverse repurchase agreements for the years ended December 31, 2016 and 2015 was as
follows (in millions):
Allocated to the Bank
2016
Total SOMA
2015
2016
2015
Primary dealers and expanded counterparties :
Contract amount outstanding, end of year
$
Average daily amount outstanding, during the year
11,505
$
12,031
$
468,355
$
474,592
2,613
2,968
105,648
125,656
Maximum balance outstanding, during the year
12,031
12,031
474,592
474,592
Securities pledged (par value), end of year
10,902
11,102
443,799
437,961
Securities pledged (fair value), end of year
11,528
12,052
469,282
475,422
Foreign official and international accounts:
Contract amount outstanding, end of year
$
6,310
$
6,028
$
256,855
$
237,809
Average daily amount outstanding, during the year
5,993
3,814
241,848
157,929
Maximum balance outstanding, during the year
6,511
6,028
265,041
237,809
Securities pledged (par value), end of year
6,127
5,839
249,417
230,333
Securities pledged (fair value), end of year
6,311
6,029
256,897
237,825
Total contract amount outstanding, end of year
$
17,815
$
18,059
$
725,210
$
712,401
$
8
$
2
$
303
$
84
Supplemental information - interest expense:
Primary dealers and expanded counterparties
Foreign official and international accounts
Total interest expense - securities sold under
agreements to repurchase
20
$
28
4
$
6
819
$
1,122
164
$
248
Securities pledged as collateral, at December 31, 2016 and 2015, consisted solely of Treasury securities. The
contract amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with
primary dealers and expanded counterparties had a term of one business day and matured on January 3, 2017. The
contract amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with
foreign official and international account holders had a term of one business day and matured on January 3, 2017.
21
Federal Reserve Bank of Boston
Notes to Financial Statements
The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS
bought outright, and reverse repurchase agreements that were allocated to the Bank at December 31, 2016 and
2015 was as follows (in millions):
Within 15
days
December 31, 2016:
Treasury securities
(par value)
GSE debt securities
(par value)
Federal agency and GSE
$
MBS (par value)1
Securities sold under
agreements to repurchase
(contract amount)
December 31, 2015:
Treasury securities
(par value)
GSE debt securities
(par value)
Federal agency and GSE
MBS (par value)1
Securities sold under
agreements to repurchase
(contract amount)
1
$
16 days to 90
days
364
$
1,013
91 days to 1
year
Over 1 year
to 5 years
$
$
3,704
30,076
Over 5 years
to 10 years
$
Over 10
years
9,808
$
Total
15,554
$
60,519
-
70
219
50
-
58
397
-
-
-
2
260
42,516
42,778
17,815
-
-
-
-
-
17,815
-
$
979
$
4,499
$
28,350
$
12,402
$
16,169
$
62,399
-
93
332
351
-
59
835
-
-
-
12
229
44,056
44,297
18,059
-
-
-
-
-
18,059
The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities.
Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted-average
life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments
and prepayment assumptions, was approximately 7.2 and 6.5 years as of December 31, 2016 and 2015,
respectively.
The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA
under securities lending agreements at December 31, 2016 and 2015 were as follows (in millions):
Allocated to the Bank
2016
2015
Treasury securities (amortized cost)
Treasury securities (par value)
$
619
$
Total SOMA
2016
2015
481
$
25,195
$
18,960
607
458
24,698
18,055
GSE debt securities (amortized cost)
1
4
44
146
GSE debt securities (par value)
1
3
44
137
Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2016
and 2015 consisted solely of Treasury securities. The securities lending agreements outstanding as of December
31, 2016 had a term of one business day and matured on January 3, 2017.
22
Federal Reserve Bank of Boston
Notes to Financial Statements
The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a
settlement-date basis. As of December 31, 2016, the total purchase price of the Treasury securities under
outstanding commitments was $11,679 million, of which $287 million was allocated to the Bank. These
commitments had contractual settlement dates extending through January 2017.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related
securities on a settlement-date basis. As of December 31, 2016, the total purchase price of the federal agency and
GSE MBS under outstanding purchase commitments was $35,787 million, none of which was related to dollar
rolls. The total purchase price of outstanding purchase commitments allocated to the Bank was $879 million, none
of which was related to dollar rolls. These commitments, which had contractual settlement dates extending
through January 2017, are for the purchase of TBA MBS for which the number and identity of the pools that will
be delivered to fulfill the commitment are unknown at the time of the trade. As of December 31, 2016, there were
no outstanding sales commitments for federal agency and GSE MBS. MBS commitments are subject to varying
degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The
FRBNY requires the posting of cash collateral for MBS commitments as part of its risk management practices
used to mitigate the counterparty credit risk.
Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the
FRBNY’s obligation to return cash margin posted by counterparties as collateral under commitments to purchase
and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure
of a seller to deliver MBS to the FRBNY on the settlement date. Although the FRBNY has ownership of and
records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until
the securities are delivered, and the amount included in other liabilities represents the FRBNY’s obligation to pay
for the securities when delivered. The amount of other liabilities allocated to the Bank and held in the SOMA at
December 31, 2016 and 2015 was as follows (in millions):
Other liabilities:
Cash margin
Obligations from MBS transaction fails
Other
Total other liabilities
Allocated to the Bank
2016
2015
$
$
25
25
$
$
13
13
Total SOMA
2016
2015
$
$
983
9
20
1,012
$
$
486
16
6
508
Accrued interest receivable on domestic securities holdings held in the SOMA was $25,517 million and $25,354
million as of December 31, 2016 and 2015, respectively, of which $627 million and $643 million, respectively,
was allocated to the Bank. These amounts are reported as a component of “System Open Market Account:
Accrued interest receivable” in the Statements of Condition.
23
Federal Reserve Bank of Boston
Notes to Financial Statements
Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE
MBS allocated to the Bank and held in the SOMA during the years ended December 31, 2016 and 2015, is
summarized as follows (in millions):
Allocated to the Bank
Notes
Balance at December 31, 2014
Purchases 1
Sales 1
Realized gains, net 2
Principal payments and maturities
Amortization of premiums and accretion of discounts, net
Inflation adjustment on inflation-indexed securities
Annual reallocation adjustment 3
Balance at December 31, 2015
Purchases 1
Sales 1
Realized gains, net 2
Principal payments and maturities
Amortization of premiums and accretion of discounts, net
Inflation adjustment on inflation-indexed securities
Annual reallocation adjustment 3
Balance at December 31, 2016
Year-ended December 31, 2015
Supplemental information - par value of transactions:
Purchases 4
Sales
Year-ended December 31, 2016
Supplemental information - par value of transactions:
Purchases 4
Sales
$
33,475
$
69
(75)
(131)
4
8,465
41,807
$
4,737
(13)
(1)
(4,661)
(125)
14
(1,291)
40,467
$
$
70
-
4,743
(14)
Bonds
$
19,042
$
19
(14)
(245)
10
4,800
23,612
$
344
(2)
1
(410)
(249)
35
(729)
22,602
Total
Treasury
securities
GSE debt
securities
$
52,517
$
809
$
88
(89)
(376)
14
13,265
65,419
$
(131)
(12)
190
856
$
5,081
(15)
(5,071)
(374)
49
(2,020)
63,069
$
(415)
(8)
(24)
409
$
19
-
$
$
344
(1)
$
89
-
5,087
(15)
Federal
agency and
GSE MBS
$
36,190
$
8,569
(9)
(7,981)
(281)
9,152
45,640
$
9,579
(5)
(9,362)
(330)
(1,427)
44,095
$
-
$
8,271
(9)
$
-
$
9,232
(5)
1
Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of
inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA
transactions that are settled on a net basis.
2
Realized gains, net is the offset of the amount of realized gains and losses included in the reported sales amount.
3
Reflects the annual adjustment to the Bank's allocated portion of the related SOMA securities that results from the annual settlement of the interdistrict
settlement account, as discussed in Note 3i.
4
Includes inflation compensation.
24
Federal Reserve Bank of Boston
Notes to Financial Statements
Total SOMA
Notes
Bonds
Total
Treasury
securities
Balance at December 31, 2014
$ 1,654,901
$ 941,340
$ 2,596,241
Purchases 1
Sales 1
Realized gains, net 2
Principal payments and maturities
Amortization of premiums and accretion of discounts, net
Inflation adjustment on inflation-indexed securities
Balance at December 31, 2015
2,736
(2,977)
(5,485)
53
$ 1,649,228
761
(543)
(10,253)
143
$ 931,448
3,497
(3,520)
(15,738)
196
$ 2,580,676
$
(5,733)
(509)
33,748
356,976
(464)
16
(333,441)
(11,721)
$ 1,800,449
Purchases 1
Sales 1
Realized gains, net 2
Principal payments and maturities
Amortization of premiums and accretion of discounts, net
Inflation adjustment on inflation-indexed securities
Balance at December 31, 2016
190,992
(534)
(22)
(187,843)
(5,049)
567
$ 1,647,339
13,882
(62)
7
(16,597)
(10,033)
1,438
$ 920,083
204,874
(596)
(15)
(204,440)
(15,082)
2,005
$ 2,567,422
(16,764)
(336)
$ 16,648
387,210
(213)
6
(379,065)
(13,384)
$ 1,795,003
$
$
$
$
-
$
344,505
(435)
$
-
$
373,197
(203)
Year-ended December 31, 2015
Supplemental information - par value of transactions:
Purchases 3
Sales
Year-ended December 31, 2016
Supplemental information - par value of transactions:
Purchases 3
Sales
$
2,747
-
191,231
(555)
$
766
-
13,868
(45)
$
3,513
-
205,099
(600)
GSE debt
securities
Federal
agency and
GSE MBS
$
39,990
$ 1,789,083
1
Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of
inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA
transactions that are settled on a net basis.
2
Realized gains, net is the offset of the amount of realized gains and losses included in the reported sales amount.
3
Includes inflation compensation.
b. Foreign Currency Denominated Investments
The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting
foreign currency denominated investments in the SOMA.
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International
Settlements and invests in foreign government debt instruments of France, Germany, the Netherlands, and Japan.
These foreign government debt instruments are backed by the full faith and credit of the issuing foreign
governments. In addition, the FRBNY may enter into repurchase agreements to purchase government debt
securities for which the accepted collateral is the debt instruments issued by a foreign government.
At December 31, 2016 and 2015, there were no repurchase agreements outstanding and, consequently, no related
foreign securities held as collateral.
The Bank’s allocated share of activity related to foreign currency operations was 4.420 percent and 4.534 percent
at December 31, 2016 and 2015, respectively.
25
Federal Reserve Bank of Boston
Notes to Financial Statements
Information about foreign currency denominated investments recorded at amortized cost and valued at foreign
currency market exchange rates held in the SOMA and allocated to the Bank at December 31, 2016 and 2015 was
as follows (in millions):
Allocated to Bank
2016
2015
Euro:
Foreign currency deposits
French government debt instruments
German government debt instruments
Dutch government debt instruments
$
Japanese yen:
Foreign currency deposits
Japanese government debt instruments
Total
$
186
172
83
65
206
147
859
$
$
Total SOMA
2016
2015
282
151
102
-
116
236
887
$
$
4,205
3,892
1,884
1,462
4,668
3,331
19,442
$
$
6,218
3,325
2,261
-
2,568
5,195
19,567
Net interest income earned on foreign currency denominated investments held in the SOMA for the years ended
December 31, 2016 and 2015 was as follows (in millions):
Total SOMA
2016
2015
Net interest income:1
Euro
Japanese yen
Total net interest income
$
$
(11)
4
(7)
$
$
24
7
31
1
As a result of negative interest rates in certain foreign currency denominated investments held in the SOMA, interest income on
foreign currency denominated investments, net contains negative interest of $32 million and $13 million for the years ended
December 31, 2016 and 2015, respectively.
Accrued interest receivable on foreign currency denominated investments, net was $79 million and $64 million as
of December 31, 2016 and 2015, respectively, of which $3 million was allocated to the Bank for each of the years
ended December 31, 2016 and 2015. These amounts are reported as a component of “System Open Market
Account: Accrued interest receivable” in the Statements of Condition.
The remaining maturity distribution of foreign currency denominated investments that were allocated to the Bank
at December 31, 2016 and 2015 was as follows (in millions):
December 31, 2016:
Euro
Japanese yen
Total
December 31, 2015:
Euro
Japanese yen
Total
Within 15
days
$
$
$
$
188
214
402
97
124
221
16 days to 90
days
$
$
$
$
15
15
30
201
16
217
91 days to 1
year
Over 1 year
to 5 years
Over 5 years
to 10 years
$
$
$
$
$
$
52
59
111
48
73
121
$
$
$
140
65
205
173
139
312
$
$
$
111
111
16
16
Total
$
$
$
$
506
353
859
535
352
887
26
Federal Reserve Bank of Boston
Notes to Financial Statements
There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31,
2016.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related
securities on a settlement-date basis. As of December 31, 2016, there were no outstanding commitments to
purchase foreign government debt instruments. During 2016, there were purchases and maturities of foreign
government debt instruments of $3,524 million and $3,767 million, respectively, of which $156 million and $168
million, respectively, were allocated to the Bank. There were no sales of foreign government debt instruments in
2016.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to
varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future
settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits,
receiving collateral in some cases, and performing monitoring procedures.
Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate
international payments and currency transactions made on behalf of foreign central banks and U.S. official
institution customers were immaterial as of December 31, 2016 and 2015.
c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was 4.420 percent and 4.534 percent at December 31,
2016 and 2015, respectively.
The total foreign currency held under U.S. dollar liquidity swaps held in the SOMA at December 31, 2016 and
2015 was $5,563 million and $997 million, respectively, of which $246 million and $45 million, respectively, was
allocated to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December
31, 2016 and 2015 was as follows (in millions):
Euro
Japanese yen
Total
2016
Within 15
days
$
192
54
$
246
2015
Within 15
days
$
42
3
$
45
Foreign Currency Liquidity Swaps
At December 31, 2016 and 2015, there was no balance outstanding related to foreign currency liquidity swaps.
d. Fair Value of SOMA Assets and Liabilities
The fair value amounts below are presented solely for informational purposes and are not intended to comply with
the fair value disclosures required by FASB Accounting Standards Codification (ASC) Topic 820 (ASC 820),
Fair Value Measurement. Although the fair value of SOMA security holdings can be substantially greater than
or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of
the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA
securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the
27
Federal Reserve Bank of Boston
Notes to Financial Statements
Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the
Statements of Operations.
The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign
government debt instruments held in the SOMA is subject to market risk, arising from movements in market
variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by
the expected rate of prepayments of mortgage loans underlying the securities. The fair value of foreign
government debt instruments is also affected by currency risk. Based on evaluations performed as of December
31, 2016 and 2015, there are no credit impairments of SOMA securities holdings.
The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the
Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA and allocated to
the Bank at December 31, 2016 and 2015 (in millions):
Allocated to the Bank
2016
Treasury securities:
Notes
Bonds
Total Treasury securities
GSE debt securities
Federal agency and GSE MBS
Total domestic SOMA portfolio securities holdings
Memorandum - Commitments for:
Purchases of Treasury securities
Purchases of Federal agency and GSE MBS
Sales of Federal agency and GSE MBS
Amortized cost
$
$
$
Cumulative
unrealized gains
(losses), net
Amortized cost
40,705
24,164
64,869
429
43,910
109,208
$
$
288
884
-
$
Fair value
40,467
22,602
63,069
409
44,095
107,573
$
287
879
-
$
$
$
Memorandum - Commitments for:
Purchases of Treasury securities
Purchases of Federal agency and GSE MBS
Sales of Federal agency and GSE MBS
Amortized cost
$
$
$
$
11,679
35,787
-
$
$
1
5
-
$
$
41,807
23,612
65,419
856
45,640
111,915
$
562
-
$
$
Amortized cost
1,657,026
983,680
2,640,706
17,442
1,787,484
4,445,632
$
$
11,719
35,974
-
$
$
9,687
63,597
73,284
794
(7,519)
66,559
40
187
-
$
$
42,318
25,515
67,833
891
45,889
114,613
$
562
-
$
$
511
1,903
2,414
35
249
2,698
-
2015
Cumulative
unrealized gains
(losses), net
Fair value
1,647,339
920,083
2,567,422
16,648
1,795,003
4,379,073
238
1,562
1,800
20
(185)
1,635
Cumulative
unrealized
gains, net
Fair value
Total SOMA
2016
Treasury securities:
Notes
Bonds
Total Treasury securities
GSE debt securities
Federal agency and GSE MBS
Total domestic SOMA portfolio securities holdings
2015
Cumulative
unrealized
gains, net
Fair value
1,649,228
931,448
2,580,676
33,748
1,800,449
4,414,873
$
22,187
-
$
$
1,669,395
1,006,514
2,675,909
35,165
1,810,256
4,521,330
$
22,170
-
$
$
20,167
75,066
95,233
1,417
9,807
106,457
(17)
-
The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide
market consensus prices based on indicative quotes from various market participants. The fair value of federal
agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers
observable inputs for similar securities.
28
Federal Reserve Bank of Boston
Notes to Financial Statements
The cost bases of repurchase agreements, reverse repurchase agreements, central bank liquidity swaps, and other
investments held in the SOMA portfolio approximate fair value. Due to the short-term nature of these agreements
and the defined amount that will be received upon settlement, the cost basis is estimated to approximate fair
value.
At December 31, 2016 and 2015, the fair value of foreign currency denominated investments held in the SOMA
was $19,510 million and $19,630 million, respectively, of which $862 million and $890 million, respectively, was
allocated to the Bank. The fair value of foreign government debt instruments was determined using pricing
services that provide market consensus prices based on indicative quotes from various market participants. The
fair value of foreign currency deposits was determined by reference to market interest rates.
The following table provides additional information on the amortized cost and fair values of the federal agency
and GSE MBS portfolio held in the SOMA and allocated to the Bank at December 31, 2016 and 2015 (in
millions):
Distribution of MBS
holdings by coupon rate
Allocated to the Bank:
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
Total
Total SOMA:
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
Total
2016
Amortized cost
$
$
$
$
2015
Fair value
259
2,981
17,037
13,788
6,771
2,121
902
204
28
4
44,095
$
10,556
121,326
693,524
561,271
275,650
86,351
36,708
8,298
1,155
164
1,795,003
$
$
$
Amortized cost
252
2,914
16,620
13,769
6,875
2,263
962
220
31
4
43,910
$
10,243
118,641
676,572
560,510
279,877
92,111
39,159
8,939
1,253
179
1,787,484
$
$
$
Fair value
284
2,954
14,055
14,687
9,155
2,938
1,240
282
39
6
45,640
$
11,198
116,527
554,430
579,403
361,149
115,914
48,931
11,138
1,542
217
1,800,449
$
$
$
279
2,916
13,772
14,752
9,343
3,144
1,331
304
42
6
45,889
10,993
115,018
543,270
581,940
368,576
124,043
52,523
11,989
1,666
238
1,810,256
29
Federal Reserve Bank of Boston
Notes to Financial Statements
The following tables present the realized gains (losses) and the change in the cumulative unrealized gains (losses)
related to SOMA domestic securities holdings during the years ended December 31, 2016 and 2015 (in millions):
Allocated to Bank
2016
Treasury securities
Realized gains
Realized gains,
Change in
cumulative
unrealized gains
(losses), net 1,2
(losses)3, 4
net 1, 2
(losses)3, 4
$
-
GSE debt securities
$
(470)
-
Federal agency and GSE MBS
Total
2015
Change in
cumulative
unrealized gains
$
-
$
-
(15)
(402)
$
(887)
$
(1,382)
-
(27)
1
$
1
(618)
$
(2,027)
Total SOMA
2016
Treasury securities
Realized gains
Realized gains,
Change in
cumulative
unrealized gains
(losses), net 1, 2
(losses)3
net 1, 2
(losses)3
$
GSE debt securities
(15)
$
-
Federal agency and GSE MBS
Total
2015
Change in
cumulative
unrealized gains
4
$
(623)
19
$
(21,949)
(39,898)
$
-
(17,326)
$
-
(1,092)
43
$
43
(44,819)
(21,654)
$
(67,565)
1
Realized losses for Treasury securities are reported in “Non-interest income: System Open Market Account: Treasury securities losses, net” in the
Statements of Operations.
2
Realized gains for federal agency and GSE MBS are reported in “Non-interest income: System Open Market Account: Federal agency and governmentsponsored enterprise mortgage-backed securities gains, net” in the Statements of Operations.
3
Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Statements of
Operations.
4
The amount reported as change in cumulative unrealized gains (losses) allocated to the Bank is affected by the annual adjustment to the Bank's allocated
portion of the related SOMA securities, as discussed in Note 3f.
The amount of change in cumulative unrealized gains (losses) position, net related to foreign currency
denominated investments was a gain of $5 million and a loss of $33 million for the years ended December 31,
2016 and 2015, respectively, of which $238 thousand and $1 million, respectively, were allocated to the Bank.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair
value hierarchy that distinguishes between assumptions developed using market data obtained from independent
sources (observable inputs) and the Bank’s assumptions developed using the best information available in the
circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:
•
Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
30
Federal Reserve Bank of Boston
Notes to Financial Statements
•
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
•
Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not
observable in the market. These unobservable inputs and assumptions reflect the Bank’s estimates of
inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation
techniques include the use of option pricing models, discounted cash flow models, and similar techniques.
Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments
are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and
other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA
financial assets is not necessarily an indication of the risk associated with those assets.
(6) BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31, 2016 and 2015 were as follows (in millions):
2016
2015
Bank premises and equipment:
Land and land improvements
$
Building
Building machinery and equipment
27
$
27
192
190
46
44
Construction in progress
1
2
Furniture and equipment
64
66
330
329
(196)
(185)
Subtotal
Accumulated depreciation
Bank premises and equipment, net
$
134
$
144
Depreciation expense, for the years ended December 31
$
18
$
19
31
Federal Reserve Bank of Boston
Notes to Financial Statements
The Bank leases space to outside tenants with remaining lease terms ranging from 1 to 11 years. Rental income
from such leases was $14 million and $13 million for the years ended December 31, 2016 and 2015, respectively,
and is reported as a component of “Non-interest income: Other” in the Statements of Operations. Future minimum
lease payments that the Bank will receive under non-cancelable lease agreements in existence at December 31,
2016, are as follows (in millions):
2017
$
12
2018
12
2019
12
2020
11
2021
9
Thereafter
Total
40
$
96
The Bank had capitalized software assets, net of amortization, of $25 million and $23 million at December 31,
2016 and 2015, respectively. Amortization expense was $5 million for each of the years ended December 31,
2016 and 2015. Capitalized software assets are reported as a component of “Other assets” in the Statements of
Condition and the related amortization is reported as a component of “Operating expenses: Other” in the
Statements of Operations.
(7) COMMITMENTS AND CONTINGENCIES
In conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates
or termination provisions, at specific rates and for specific purposes.
At December 31, 2016, the Bank was obligated under non-cancelable leases for premises and equipment with
remaining terms ranging from 1 to approximately 3 years. These leases provide for increased lease payments
based upon increases in real estate taxes, operating costs, or selected price indexes.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office
equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was not
material for the years ended December 31, 2016 and 2015.
Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining
terms of one year or more, at December 31, 2016, were not material.
At December 31, 2016, there were no material unrecorded unconditional purchase commitments or obligations in
excess of one year.
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a perincident basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank,
up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s
capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the
loss is shared. No claims were outstanding under the agreement at December 31, 2016 and 2015.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is
difficult to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with
32
Federal Reserve Bank of Boston
Notes to Financial Statements
counsel, the legal actions and claims will be resolved without material adverse effect on the financial position or
results of operations of the Bank.
(8) RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and
level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office
of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of
the Federal Reserve System (System Plan).1 Under the Dodd-Frank Act, newly hired Bureau employees are
eligible to participate in the System Plan and, during the years ended December 31, 2016 and 2015, certain costs
associated with the System Plan were reimbursed by the Bureau. In addition, employees at certain compensation
levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate
in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).
The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the
System Plan in its consolidated financial statements. The Bank reports the net cost related to the BEP and SERP
as a component of “Operating expenses: Salaries and benefits” in its Statements of Operations and reports the net
liability as a component of “Accrued benefit costs” in its Statements of Condition.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at
December 31, 2016 and 2015, and for the years then ended, were immaterial.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve
System (Thrift Plan). The Bank matches 100 percent of the first 6 percent of employee contributions from the date
of hire and provides an automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan
contributions totaled $8 million and $7 million for the years ended December 31, 2016 and 2015, respectively,
and are reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Operations.
(9) POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service
requirements are eligible for both medical and life insurance benefits during retirement.
The Bank and plan participants fund benefits payable under the medical and life insurance plans as due and the
plans have no assets.
1
The OEB was established by the System to administer selected System benefit plans.
33
Federal Reserve Bank of Boston
Notes to Financial Statements
Following is a reconciliation of the beginning and ending balances of the benefit obligation for the years ended
December 31, 2016 and 2015 (in millions):
2016
Accumulated postretirement benefit obligation at January 1
$
2015
67.2
$
66.6
Service cost benefits earned during the period
2.4
2.4
Interest cost on accumulated benefit obligation
3.0
2.7
Net actuarial loss (gain)
5.7
(1.3)
Contributions by plan participants
2.1
1.8
(6.1)
(5.3)
Medicare Part D subsidies
0.3
0.3
Plan amendments
1.9
-
Benefits paid
Accumulated postretirement benefit obligation at December 31
$
76.5
$
67.2
At December 31, 2016 and 2015, the weighted-average discount rate assumptions used in developing the
postretirement benefit obligation were 4.07 percent and 4.31 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows
necessary to pay the plan’s benefits when due. The System Plan discount rate assumption setting convention uses
an unrounded rate.
Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded
postretirement benefit obligation and accrued postretirement benefit costs for the years ended December 31, 2016
and 2015 (in millions):
2016
Fair value of plan assets at January 1
$
2015
-
$
-
Contributions by the employer
3.7
3.3
Contributions by plan participants
2.1
1.8
(6.1)
(5.4)
Benefits paid
Medicare Part D subsidies
Fair value of plan assets at December 31
Unfunded obligation and accrued postretirement benefit cost
0.3
0.3
$
-
$
-
$
76.5
$
67.2
(2.5)
$
(0.4)
Amounts included in accumulated other comprehensive (loss) income are shown below:
Prior service cost
$
Net actuarial (loss) gain
Deferred curtailment gain
Total accumulated other comprehensive (loss) income
$
(1.1)
4.6
1.3
1.3
(2.3)
$
5.5
Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of
Condition.
34
Federal Reserve Bank of Boston
Notes to Financial Statements
For measurement purposes, the assumed health-care cost trend rates at December 31, 2016 and 2015 are provided
in the table below. The current health-care cost trend rate for next year is expected to decline ratably each year
until achieving the ultimate trend rate in 2022:
2016
Health-care cost trend rate assumed for next year
2015
6.60%
7.00%
4.75%
4.75%
2022
2022
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A
one percentage point change in assumed health-care cost trend rates would have the following effects for the year
ended December 31, 2016 (in millions):
One percentage
point increase
One percentage
point decrease
Effect on aggregate of service and interest cost components
of net periodic postretirement benefit costs
$
1.1
Effect on accumulated postretirement benefit obligation
$
10.9
(0.9)
(9.0)
The following is a summary of the components of net periodic postretirement benefit expense for the years ended
December 31, 2016 and 2015 (in millions):
2016
Service cost-benefits earned during the period
$
Interest cost on accumulated benefit obligation
Amortization of prior service cost
Net periodic postretirement benefit expense
$
2015
2.3
$
2.4
3.0
2.7
(0.1)
(0.4)
5.2
$
4.7
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic
postretirement benefit expense in 2017 are shown below:
Prior service cost
$
Net actuarial loss
Total
0.5
-
$
0.5
Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1,
2016 and 2015, the weighted-average discount rate assumptions used to determine net periodic postretirement
benefit costs were 4.31 percent and 3.96 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and
benefits” in the Statements of Operations.
A deferred curtailment gain was recorded in 2014 as a component of accumulated other comprehensive loss; the
gain is recognized in net income in future years when the related employees terminate employment.
35
Federal Reserve Bank of Boston
Notes to Financial Statements
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug
benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans
that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the
Bank’s plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug
benefit. The estimated effects of the subsidy are reflected in actuarial gain (loss) in the accumulated
postretirement benefit obligation and net periodic postretirement benefit expense.
During 2016, the Reserve Banks adopted an amendment to their health benefits program that added a Medicare
Advantage and Prescription Drug (MAPD) plan to the program effective January 1, 2017. The MAPD plan is a
fully insured product that combines into one integrated benefit Medicare and Medicare Supplement coverages, as
well as prescription drug coverage. The plan amendment resulted in an increase in the Bank’s accumulated
postretirement benefit obligation in the amount of $1.9 million as of December 31, 2016, with an equivalent
change in the prior service component of accumulated other comprehensive income.
Federal Medicare Part D subsidy receipts were $192 thousand and $212 thousand in the years ended December
31, 2016 and 2015, respectively. Expected receipts in 2017, related to benefits paid in the years ended December
31, 2016 and 2015, are $175 thousand and $133 thousand, respectively.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy
2017
$
3.6
With subsidy
$
3.5
2018
3.9
3.9
2019
4.1
4.1
2020
4.3
4.2
2021
4.4
4.3
2022 - 2026
Total
23.9
$
44.2
23.8
$
43.8
Postemployment Benefits
The Bank offers benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially
determined using a December 31 measurement date and include the cost of providing disability; medical, dental,
and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the
Bank at December 31, 2016 and 2015 were $4.5 million and $5.6 million, respectively. This cost is included as a
component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit
(credit) expense included in 2016 and 2015 operating expenses were $(264) thousand and $547 thousand,
respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Statements of
Operations.
36
Federal Reserve Bank of Boston
Notes to Financial Statements
(10)
ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE INCOME
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive (loss)
income as of December 31, 2016 and 2015 (in millions):
Balance at January 1
2016
2015
Amount related
to postretirement
benefits other
than retirement
plans
Amount related
to postretirement
benefits other
than retirement
plans
$
6
$
5
Change in funded status of benefit plans:
Prior service costs arising during the year
Change in prior service costs related to
benefit plans
Net actuarial (loss) gain arising during the
year
Change in actuarial (loss) gain related to
benefit plans
Change in funded status of benefit plans other comprehensive (loss) income
Balance at December 31
(2)
-
(2)
-
(6)
1
(6)
1
(8)
$
(2)
1
$
6
Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9.
(11)
BUSINESS RESTRUCTURING CHARGES
The Bank had no business restructuring charges in 2016 and 2015. In 2014, the Treasury announced a plan to
consolidate the number of Reserve Banks providing fiscal agent services to the Treasury from 10 to 4. As a result
of this initiative, the Invoice Processing Platform and Stored Value Card operations performed by the Federal
Reserve Bank of Boston will be transitioned to the Federal Reserve Bank of St. Louis and the Federal Reserve
Bank of Kansas City, respectively. The Treasury Cash Management System operations performed by the Federal
Reserve Bank of Boston was transitioned to the Federal Reserve Bank of Cleveland in 2016.
37
Federal Reserve Bank of Boston
Notes to Financial Statements
Following is a summary of financial information related to the restructuring plans (in millions):
2014
restructuring
plans
Information related to restructuring plans as of
December 31, 2016:
Total expected costs related to restructuring activity
$
Estimated future costs related to restructuring activity
10
0.4
Expected completion date
2020
Reconciliation of liability balances:
Balance at December 31, 2014
$
Employee separation costs
3
Other costs
2
Adjustments
(1)
Payments
Balance at December 31, 2015
(1)
$
Other costs
8
1
Payments
Balance at December 31, 2016
5
(1)
$
8
Employee separation costs are primarily severance costs for identified staff reductions associated with the
announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements
are recorded based on the accumulated benefit earned by the employee. Separation costs that are provided under
the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the
termination date and recorded ratably over the period to termination. Restructuring costs related to employee
separations are reported as a component of “Operating expenses: Salaries and benefits” in the Statements of
Operations.
Other costs comprise of retention costs and are shown as a component of “Operating expenses: Salaries and
benefits” in the Statements of Operations.
Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY
as discussed in Note 8.
38
Federal Reserve Bank of Boston
Notes to Financial Statements
(12)
DISTRIBUTION OF COMPREHENSIVE INCOME
The following table presents the distribution of the Bank’s comprehensive income for the years ended December
31, 2016 and 2015 (in millions):
2016
Dividends on capital stock
Transfer from surplus
Earnings remittances to the Treasury:
Interest on Federal Reserve notes
Required by the Federal Reserve Act
Total distribution
$
$
2015
30
(9)
2,253
2,274
$
$
78
(854)
1,989
1,021
2,234
Before the enactment of the FAST Act, the amount reported as transfer from surplus represented the amount
necessary to equate surplus with capital paid-in, in accordance with the Board of Governor’s policy. Subsequent
to the enactment of the FAST Act, the amount reported as transfer from surplus represents the amount necessary
to maintain surplus at an amount equal to the Bank’s allocated portion of the aggregate surplus limitation.
On December 28, 2015, the Reserve Banks reduced the aggregate surplus to the $10 billion limit in the FAST Act
by remitting $19.3 billion to the Treasury. The Bank’s share of this remittance was $851 million, which is
reported as a component of “Earnings remittances to the Treasury: Required by the Federal Reserve Act” in the
Bank’s Statements of Operations, and in the table above.
(13)
SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to or disclosures in the financial statements as of
December 31, 2016. Subsequent events were evaluated through March 8, 2017, which is the date that the financial
statements were available to be issued.
39